Auction mechanisms and Internet auction Chia-Liang Hung 20004,10,15
Auction mechanisms and Internet auction
Chia-Liang Hung20004,10,15
Contents
Types of auction mechanism Purposes of Internet auction
pricing Internet auction model Principles of efficient mechanism
designing
What is an auction? An auction is a market institution with an e
xplicit set of rules determining resource allocation and prices on the basis of bids from the market participants, including both seller of offering and buyer of bidding.
The word “auction” is derived from the Latin augere, which means “to increase.”
The purpose of auction
Why are auctions used rather than other selling approaches such as the fixed/menu price? Heterogeneous value—the price, that is the
willingness-to-pay, depends on the demand and supply conditions at a specific moment of time, and a specific spot of place
Resolution of information asymmetry—promote many competitors to reveal truth
Some auctioning mechanisms
English auction Dutch auction Reverse auction First-price sealed-bid auction Second-price sealed-bid auction Multi-unit auction Yankee auction Double auction met de borden—arbitrational auction
English- vs. Dutch auction
Repeated competitive games English auction—an ascending-bid auction
that is usually used for selling goods through raising and posting price openly. E.g., antiques and artwork
Dutch auction—a descending-bid auction that starts by the auctioneer’s initial high price and then lowers the price down until one bidder accepts the current price. E.g., flowers in Netherlands, fish in Island, tobacco in Canada
Options of English auctionInitiate price
Does the $1 bidding game extract more benefit?Reserved price—the seller’s bottom line
Is it proper to reserve the draw-back right at the end of game?Forestall price—in other words, an open reserved price
The effect of forestall?Markup range
% of initiate price or arbitrary settingHistory-tracing—the whole historical log or the latest?Snipping agents
The influence of automatic price snipping?Auto-extension—prevention of wait-and-see holding
Empirical testing on the auction behavior of G2HK
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Starting price
Markup ratio
Reservation option
Forestall option
Agent option
DurationBids
Ending price
DealBrowses
+*
Reverse auction A repeated descending-bid auction is la
unched by the buyer to invite the sellers’ participation. E.g., Priceline.com, much lower the bidding price, much better t
he buyers’ utility cf., Dutch auction
Much lower the auctioning price, much inferior the sellers’ benefit
First-price vs. second-price sealed bidding
One-shot game simultaneouslyFirst-price sealed-bid auction—the bidder is awarded the sold object in expense of the submitted highest price. (Dutch equivalence)
E.g., the government sells the land or the mineral right
Second-price sealed-bid (or Vickrey) auction—the bidder is awarded the sold object by submitting the highest price but in expense of the submitted second-highest price.
This approach was seldom used in practice even though it possessed a theoretical efficient property—much less incentive for bidders
The efficiency of Vickrey auction
Price
•The bidding criteria: valuation ≥ bidding price•A will win and always be charged less than his own valuation even though he had issued his maximum valuation price as long as his valuation is the highest among the competitors.
A’s valuation
B’s valuation
C’s valuation
A’s price
B’s price
C’s price
The failed design of auctions
First-price sealed-bid auctionRevealed prices under the bidders’ true valuation—bidding price=[(n-1)/n] ×valuation, n=# of participants
more participants may close the gapSecond-price sealed-bid auction (facilitated by some incentives) may cure the fallacy
Dutch auction—the bidding price is usually lower than the true valuation of bidder
Partitioning the game of one price for total objects into discriminatory sale for smaller number units
Multi-unit auctions A repeated auction mechanism for exchanging
several identical goods is used to be conducted on the commodity market
For a multi-unit auction, the necessary condition is the amount of bidders must be more than the auctioned objects
The supply side10-unit identical goods
The demand side A, $100, 3 units B, $95, 4 units C, $92, 5 units D, $90, 3 units
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Different incentives of multi-unit auctions
The individual bidding price vs. the last exchanged priceThe supply side
10-unit identical goods
The demand side A, $100, 3 units B, $95, 4 units C, $92, 5 units D, $90, 3 units
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34
A, $100 X 3B, $95 X 4C, $92 X 3
orA, B, C, $92 X 10
Conservative & lower-valuation bidding behavior
Truth revelation on individual bidding price
Dutch multi-unit auction
The supply side10-unit identical goods
The demand side$100, —, 10 units$99, —, 10 units$98, (A/5 units), 5 units$97, —, 5 units$96, (B/3 units), 2 units$95, (C/2 units), 0 units
• An descending-bid multi-unit auction that starts by the initial high price and then lowers the price until all products had been selected by the bidders’ prices.•The agricultural commodity auction—immediate demand and short-duration goods
Hog auction market by Dutch auction
Yankee auction
A multi-criteria matching mechanism Prioritize the allocation by the quantity, the
issued time, credit rating, or other signals Apply especially on the multi-unit auctions
The supply side10-unit identical goods
The demand side A, $100, 3 units B, $95, 4 units C, $95, 5 units D, $90, 3 units
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52
Double auction (i) Several sellers and several buyers submit bids
simultaneously, especially on the stock exchanges and commodity markets
A sealed-bid matching process promotes transactions to occur only when the sellers’ prices less than the buyers’ prices.
The sellers could not raise their own prices too high to match the buyers’ expectation, while the buyers would not post too low bidding prices to attract the sellers.
E.g., B2B Internet auction for trading the industrial materials
Double auction (ii) The demand side
A, $100, 20 units B, $90, 30 units C, $85, 40 units D, $80, 30 units
The supply side a, $75, 30 units b, $80, 25 units c, $85, 20 units d, $90, 30 units
The matched outcomes with average prices A-a, $87.5, 20 units B-a, $82.5, 10 units; B-b, $85, 20 units C-b, $82.5, 5 units; C-c, $85, 20 units
20
1020
5 20
Double auction (iii)
If there are sufficiently many buyers and sellers, there would be no other trading mechanism the could increase some traders’ expected gains from trade without lowering the others’ expected gains down—an efficient state so called “Pareto Optimality”
Stock exchange—a case of double auction
cumulative buying
buying price board selling cumulative selling
162 162 94 347
57.5
162 57 36 253
162 56.5 25 217185 23 56 20 192
195 10 55.5 15 172195 55 46 157
252 57 54.5 55 111252 54 20 56
282 30 53.5 13 36282 53 3 23
381 99 52.5 20381 52 20
403 22 51.5 20408 5 51 20
441 33 -50.5 20 20
The last exchanged price
Stock exchange—a case of double auction (cont.)
cumulative buying
buying price board selling cumulative selling
57.5 94 162
57 36 68
56.5 25 32
56 7 7
10 10 55.5
10 55
67 57 54.5
67 54
97 30 53.5
97 53
196 99 52.5
196 52
218 22 51.5
223 5 51
256 33 -50.5
The revealed selling price for the next stage
The revealed buying price for the next stage
met de Borden auctionArbitrational auction
Both sellers and buyers can be the auction initiators to issue the bidding to the arbitrator
Announce the auction item (property and quantity) Selling auction—looking for the candidate buyer Buying auction—looking for the candidate seller
Compromise the disperse prices between the seller’s and the buyer’s based on the general market price
Open the arbitrated price and charge the arbitration commission even though the initiator had retreated the auction at the end
Immediately timely auction
The buyer views of Internet pricing
Enabling by search engine Convenient Fast
Time-saving Self-service One-stop shopping Real-time comparison
Energy-saving Quick browsing Automation Integration—brick & click
Seller views of Internet pricing
Pricing objectives From profit-based objective to market-share-based
and competitive-based objective Marketing mix
Be consistent between online and offline dealing Cost structure
(+)The last-mile distribution, affiliation, customer acquisition cost (CAC)
(-)inventory, overhead, distribution of digit product, online customer service, e-mailing promotion, order processing
Internet online auction
Product category—primarily limited to consumer products Computer h/w & accessories, computer s/w, consumer el
ectronics, sporting goods, toys,… More than 5 products offered on a general auction site
Business model—most focused on C2C(eBay) or B2C(uBid), less for B2B (for quality consideration) Special case—C2B, a reverse call for auction, e.g., Pricelin
e.com & TravelBids
Internet auctioning rules and webs
Most adopted the English/straight type of auction for a specific single item, or Yankee type multi-unit auctions
Few adopted the Dutch auction Intermodal Exchange for vessel container Klil-Klok for three-minute auction
The most innovative & popular auction rule is reverse auction driven by the buyer
A high potential business of mobile commerce Few adopted the double auction on B2B model
FastParts for electronics parts LabX for laboratory experimental equipments Dallas Gold for jewelry (commodity)
Innovative bidding agents The clients setup the maximum bidding amount
to the agent without monitoring the auction activities, then the latter will continue to enter the lowest winning bid until the maximum bid is met.
Cross-website swapping agents E.g., BidFind.com, BidSmart.com, Bidder’sEdge.com,
RU sure.com, etc Problems of infringing privacy and copyright
The revenue flow of internet auction site
As an intermediary for aggregating information e.g., eBay on C2C, or FairMarket on B2B for comp
uter electronics Insertion fee for listing an item Final value fee—as commission charged only whe
n goods had been successfully sold As a seller for online retailing, e.g., uBid
Quantity discount compensation Advertisement fee
Internet Auction: Schematic Business Model
Internet Auction
Buyer 1
$i
Seller 1
$
$
Listing Fee, commission $
Ally
e.g., eBay
Seller 2 Buyer 2
i
$
o
oi
iChat rooms,Feedback forum, email
O: objects flow$: money flowi: information flow
The possibility to auction The degree of information asymmetry
between two sides The credibility of commitments—of
sellers as well as of buyers Safeguard promise vs. bonding cost
The potential damage of reneges The importance of futurity—reputation,
punishment & enforcement cost
The successful factors of Internet auctions
The right products— Standardized, non-perishables, commodities, etc, for large sale volume and reputation spillover
Collectibles, local/timely information for niche of special offerings
Lower degree of information asymmetry Credible safeguard & easy enforcement
The innovative/proper auction rule The demand attitude, the transaction mechanism
Promotion effort for attraction Leverage with allies, e.g., portals and retailers
The incentive principles: IR & IC
IR (individual rationality) the auction game must be attractive
enough to induce participation IC (incentive compatibility)
the auction game should be deliberately designed to guide the participants to act like what the auctioneer wanted or to reveal truth for rewarding something compensated by the auctioneer
Conclusion As an auction designer
Arrange your auction mechanism IR condition IC condition
A flexible all-in-one platform (a forthcoming experiment on the site of Youthwant)
The potential utility of auctioning over the mobile network
As a bidder Select an efficient auctioning approach with proper
options for retaining surplus